Inspiration from physics for thinking about economics, finance and social systems

Tuesday, September 20, 2011

A bleak perspective... but probably true

I try not to say too much about our global economic and environmental future as I have zero claim to any special insight. I do have a fairly pessimistic view, which is reinforced every year or so when I read in Nature or Science the latest bleak assessment of the rapid and likely irreversible decline of marine ecosystems. I simply can't see humans on a global scale changing their ways very significantly until some truly dreadful catastrophes strike.

Combine environmental issues with dwindling resources and the global economic crisis, and the near term future really doesn't look so rosy. On this topic, I have been enjoying an interview at Naked Capitalism with Satyajit Das (part 1, part2, with part 3 I think still to come) who has worked for more than 30 years in the finance industry. I'm looking forward to reading his new book "Extreme Money: Masters of the Universe and the Cult of Risk." Here's an excerpt from the interview which, as much as any analysis I've read, seems like a plausible picture for our world over the next few decades:

There are problems to which there are no answers, no easy solutions. Human beings are not all powerful creatures. There are limits to our powers, our knowledge and our understanding.

The modern world has been built on a ethos of growth, improving living standards and growing prosperity. Growth has been our answer to everything. This is what drove us to the world of ‘extreme money’ and financialisation in the first place. Now three things are coming together to bring that period of history to a conclusion – the end of financialisation, environmental concerns and limits to certain essential natural resources like oil and water. Environmental advocate Edward Abbey put it bluntly: “Growth for the sake of growth is the ideology of a cancer cell.”

We are reaching the end of a period of growth, expansion and, maybe, optimism. Increased government spending or income redistribution, even if it is implemented (which I doubt), may not necessarily work. Living standards will have to fall. Competition between countries for growth will trigger currency and trade wars – we are seeing that already with the Swiss intervening to lower their currency and emerging markets putting in place capital controls. All this will further crimp growth. Social cohesion and order may break down. Extreme political views might become popular and powerful. Xenophobia and nationalism will become more prominent as people look for scapegoats.

People draw comparisons to what happened in Japan. But Japan had significant advantages – the world’s largest savings pool, global growth which allowed its exporters to prosper, a homogeneous, stoic population who were willing to bear the pain of the adjustment. Do those conditions exist everywhere?

We will be caught in the ruins of this collapsed Ponzi scheme for a long time, while we try to rediscover more traditional sources of growth like innovation and productivity improvements – real engineering rather than financial engineering. But we will still have to pay for the cost of our past mistakes which will complicate the process.

Fyodor Dostoevsky wrote in The Possessed: “It is hard to change gods.” It seems to me that that’s what we are trying to do. It may be possible but it won’t be simple or easy. It will also take a long, long time and entail a lot of pain.

Hi, Mark. I read your article "Wealth Happens" when I was studying marketing at a university in Mexico City. Maybe this will sound weird, since you don't write self-help, but that article changed my life and started my interest in economics. I am so in love with your ideas, now that I'm doing my master's degree I will use it for my dissertation in a social studies class. I was wondering if there are any of your books or articles available in Mexico. I really admire your work, so tell me how to join the fan club! I'm ready!

About David's comment, I think he's wrong, not all cultures and people want to grow. Take a look at Georges Bataille book "The Accursed Share" which digs deep into different cultures and the way they spend or destroy the "surplus" or excess of wealth. Some use it for growth, others don't, examples of this include sacrifice among the Aztecs, potlach among the Northwest Coast Indians, and Buddisth monasticism in Tibet.

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This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

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Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.